'Tis the season for Christmas shopping, and this year online retailers are paying more attention to people browsing at search engines. They're also spending more in the bidding war for the top spots in the "sponsored links" that appear above and to the right of the unpaid search results, paying a fee for each click by a potential new customer.

"This year people have gotten really serious about search," says Fredrick Marckini, chief executive and founder of iProspect, which helps retailers like Circuit City, Sharp Electronics, Columbia House and Lids.com manage pay-per-click advertising campaigns, as well as improve their rankings in unpaid search results.

The company, based in Watertown, Mass., has some retail clients spending hundreds of thousands of dollars per month on search engine marketing during the holiday season. That was the case last year, too, but only for a smaller group of merchants. "Paid search is the fastest growing segment of our business," Marckini says.

That's true for other search engine-marketing firms as well. Their customers are spending more this holiday season, and with a year or two of experience under their belts, they have more refined tools to determine how much to spend, and where.

Overall, 7 out of 10 retailers plan to spend more on paid listings on search engines during the holiday season, according to results of a study by Shop.org, an industry trade group of online retailers. The group found that the average retailer spent $877,000 on search engine marketing in 2004, more than twice as much as the average of $399,000 for the previous year. During that time, the spending jumped from 10 percent of total online marketing budgets to 19 percent.

At this time of year, the cost of some search terms can double or even triple, but conversion rates -- how often a click leads to a sale -- also jump. Sales in the last three months of the year account for at least 30 percent of sales for most online retailers.

They shouldn't be tempted, though, by bidding high on terms that shoppers might type most often into Google, Yahoo or MSN. Higher conversion rates are associated with more detailed keywords -- "Christmas gift baskets with chocolate, " for example, rather than just "Christmas gifts" -- says Lisa Wehr, chief executive of Oneupweb. The company, based in Lake Leelanau, Mich., works with Silkflowers.com, Schwans.com, ImpromptuGourmet.com and others.

"The more specific the keyword search string, the more likely that person is to buy," she says. At this time of year, "we're not as interested in paying for click-throughs for people who are researching. The traffic we pay for we want to be people who are actively looking to purchase."

Charles Sardou, director of paid search at New-York based ICrossing Inc., says retailers are taking more care this year to optimize their paid-search campaigns and be more precise about which terms will earn a return and where they spend their money.

"Everyone's measurement process is getting better the past two years. Last year was the first time they had good tools," he says.

Despite that, he expects the price for general search terms like "Christmas gifts" to skyrocket in the coming weeks, from 30 or 40 cents in September and October to as much as $7 or $8.

"The problem with the search marketplace, because it's active bidding, it's like eBay, there's always that one guy who's willing to pay a ridiculous amount of money for something," Sardou says.

But even at $4 or $5 per click, paid search is probably more effective than TV advertising, he says. The Body Shop, Crabtree & Evelyn, Disney and Restoration Hardware are all ICrossing customers.
"I expect less hysteria and less people overpaying for traffic this year," Sardou says. But if Father's Day is any indication, the spending frenzy could be wild. Last June, he says, the term "father's day gift" went from a dime to $5 within a week.

It's common sense to bid on product names as terms, like the Roboraptor, one of the season's popular toys. But choosing terms also requires anticipating shopper behavior at a search engine.

"It's not just the hot toy, but how are they going to misspell it? What are the keywords that surround it? That takes research," says Marckini of IProspect. "Anybody can go and buy ‘Roboraptor,' but what number of people won't remember the name and will search for ‘robot toy' instead?"
And what happens after some toys inevitably sell out? The searches for them won't stop, he says, so retailers are building a strategy for terms that introduce shoppers to substitute items.

Since last summer, if not before, retailers have been testing the "landing pages" on their sites, where shoppers arrive after clicking on an ad next to search results. Sardou says more merchants than last year are studying how subtle changes, such as to a headline or a buy-now offer, can make people more likely to buy.

Search engines have become the gateway for many people on the Web looking to make a purchase. Traffic monitoring firm Hitwise reports that for the week ending Nov. 12, the top five most popular sites in its Online Retail Index -- Froogle.com, Bizrate.com, Shopzilla.com, Shopping.com and Nextag.com, all shopping comparison sites -- each attracted more than half their traffic from search engines. In the three most popular shopping subcategories -- rewards and directories, intimate apparel and accessories, and house and garden -- search engines accounted for one-third of total traffic.

Overall, Hitwise says traffic this year closely follows 2004, with a big spike predicted on Thanksgiving, when many people go online to research sales, and the days immediately following.

However, Google and Yahoo Search sent 25 percent more visits to the 10 leading shopping comparison sites for the week ending Nov. 19 compared to the same period a year ago, according to Hitwise.